PT  - JOURNAL ARTICLE
AU  - Sanjiv Ranjan Das
AU  - Seoyoung Kim
TI  - Managing Rollover Risk with Capital Structure Covenants in Structured Finance Vehicles
AID  - 10.3905/jfi.2017.26.4.092
DP  - 2017 Mar 31
TA  - The Journal of Fixed Income
PG  - 92--112
VI  - 26
IP  - 4
4099  - https://pm-research.com/content/26/4/92.short
4100  - https://pm-research.com/content/26/4/92.full
AB  - The shadow banking system comprises special purpose vehicles (SPVs) characterized by high debt, illiquid long-maturity assets funded predominantly by short-maturity debt, and tranched liabilities, also known as the capital structure of the SPV. These three features lead to an adversarial game among senior-note holders, who solve for an optimal rollover policy based on the other senior tranches with varying rollover dates. This rollover policy is, in turn, taken into account by capital-note holders (i.e., investors in the equity tranche) when choosing the capital structure (i.e., the assets-to-debt ratio) of the SPV. Rollover risk increases in the number of time tranches, resulting in a lower equilibrium level of debt and higher cost of debt. The expected life of the SPV may also be shortened. We propose a covenant-based capital structure that mitigates these problems and is Pareto-improving for equity and debt holders in the SPV.TOPICS: Fixed income and structured finance, volatility measures